Almost everyone agrees that too much borrowing (aka “leverage”) was at the core of the financial
crisis and Great Recession.

Too many risky loans were made. Where do we stand five years after Lehman Brothers? Well, there’s
good news and bad.

The good is that American households and businesses have cut their debt burdens. The bad news is
that in most other countries, they haven’t .

The economic implications are plain. If you’re devoting more of your income to debt repayment,
you’re probably spending less at the mall. On paper, Americans’ lighter debt burdens suggest a
stronger economy. By the same logic, steep debt levels elsewhere may retard the worldwide
recovery.

Let’s go to the numbers. These come from the McKinsey Global Institute, which has been tracking
debt in major economies. To measure the relative burden of debts, McKinsey compares them to the
country’s economy, its gross domestic product. Here are McKinsey’s latest findings for the United
States.

Start with households, whose debts consist mostly of home mortgages, credit card loans, and auto
and student debt. From year-end 2000 to 2007, household debt almost doubled, from $7 trillion to
$13.7 trillion. As a share of GDP, it went from 69 percent to 96 percent. That was the credit
bubble inflating. But since 2007, household debt has dropped by nearly $1 trillion to $12.8
trillion. The GDP share has fallen to 80 percent. This was the bubble popping: mortgages defaulting
and being written off, or borrowers skimping on spending to repay debts.

Something similar has happened to non-financial businesses — companies such as IBM, Google and
Wal-Mart. True, their debt rose from nearly $11 trillion (77 percent of GDP) in 2007 to $12.9
trillion (81 percent of GDP) in 2013. But these figures overlook the reality that much corporate
debt has been refinanced at lower interest rates. As a result, says economist Susan Lund of
McKinsey, annual corporate interest payments dropped by nearly $200 billion from 2007 to 2012, from
$551 billion to $369 billion. Lower debt and interest rates did the same for households, whose
interest payments also fell about $200 billion from 2007 to 2012.

These developments are a plus for the U.S. economy. Consumers are better positioned to spend,
and — if demand strengthens — businesses are better positioned to invest in new production
capacity.

Abroad, the picture is darker. True, private debt in some countries is low or declining. Germany’<
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Indeed, some economists argue these low debt levels show that Germany’s economy depends too heavily
on exports and not enough on domestic demand. But Germany is an exception. Many countries have high
private debt levels. In Britain, both household and business debts are near 100 percent of GDP. In
Canada, household debt is 96 percent of GDP; in Australia, it’s 106 percent of GDP. Both these
countries, says Lund, might suffer housing bubbles with prices collapsing and defaults increasing.
This is already happening in the Netherlands, she says, where household debt reached 125 percent of
GDP.

Together, what do these numbers mean for the world economy? Bear in mind three realities.

First, there’s no magic debt level — compared to GDP — that’s just right or too much. The
amounts may vary by country. Nations with faster growth can usually bear more debt, which can be
repaid from rising incomes. Still, the higher debt goes, the more likely it will reach a tipping
point that triggers a broad credit pullback (and higher interest rates) or a full-fledged
crisis.

Second, just because U.S. private debt levels have dropped doesn’t mean that American consumers
and businesses will go on a spending spree. Shaken by the Great Recession, they may reduce debt
further or increase savings against future setbacks.

Third, government debt has expanded in most countries. In some, it substituted for contracting
private debt. In the United States, government debt (including state and local borrowing) rose from
56 percent of GDP in 2007 to 93 percent in 2013. In Japan, government debt in 2012 was 228 percent
of GDP. In Britain, it was 95 percent. So far, financial markets have accepted these high levels
without imposing punishing interest-rate increases. But despite the talk of too much “austerity,”
countries will want to restrain large debt increases for fear of a market backlash. The resulting
higher taxes or lower spending could dampen growth.

So any deleveraging report card must be maddeningly hedged. An honest grade is: incomplete.